Reporting Line Correlation Calculations

For the Reporting Lines (or replines), regression coefficients are calculated using the R-model based on the threshold values. It is considered that a pairwise relationship exists between independent and dependent Reporting Lines.

In What-if Analysis, you can make variations to the value of a variable. Variations can be applied only to the following Reporting Lines in the Income Statement:

• Interest Income
• Interest Expenses
• Transfer Pricing Charge
• Transfer Pricing Credit
• Non-Interest Income
• Operating Expenses
• Net Credit Losses
• Other Revenue

The following parameters are available in the FSI_MODEL_PARAMETERS table:

• The Start Date of the Reference Period
• The End Date of the Reference Period
• Percentage of values that lie within the threshold
• Percentage of outliers that need to be removed

The following steps are used in Repline Correlation Calculation:

• Excluding Outliers: For each variable, the sigma and mean are calculated within the reference period as defined in the Database. If the value of the variable lies outside the threshold provided, the respective pairs are excluded for all associated variables.

  Pairs are excluded based on the Mahalanobis Distance, that is, pairs are excluded in descending order of their absolute distance from the mean.

• Testing for Stationarity: After the outliers are excluded, the Augmented Dickey Fuller test (ADF Test) is used to check for stationarity on the Time Replines. The stationary is checked for each Repline at two levels: I(0) and I(1). If any Time Repline is not found to be stationary, do a differencing of data, and repeat the test.

  add.test is a function of the R-library. A limitation of the R-library is that the stationary value can be calculated only if the records or data points are more than or equal to 6.

  Results are reported and used in the co-integration test.

• Testing for Co-integration: After the stationary test is done, the causal relations between regression variables are checked. Then co-integration is done.
  The following table lists the action that is performed for pairwise stationarity and pairwise integration based on the stationarity level:

  Table 2-4 Action performed Pairwise Stationary and Pairwise Co-integration

  Pairwise Stationarity	Pairwise Co-integration	Action
  Both I(1)	Exists	Do regression without any transformation
  	Does not exist	Do regression after differencing
  Both(0)	NA	Do regression without any transformation
  One I(1) other I(0)	NA	Do regression after differencing I(1) series